The Help to Buy: Equity Loan Scheme
The Help to Buy: equity loan scheme is a Government backed programme designed to help those who have a smaller deposit buy a newly built home in England. The scheme is managed by the Homes and Communities Agency (known as Homes England) who are the national housing regeneration agency for England. You still own 100% of the property and it is available for both first time buyers and home movers.
Date of Availability
The Help to Buy scheme has been available since 2013. In November 2015, the government announced an extension of the initiative up to 2021 but it may close earlier if all of the funding is taken up before 2021.
The main things you need in order to qualify for the scheme are;
- Needs to be a new build property in England
- Needs to be your only home so it cannot be used to purchase a second property or to be let out
- Make sure the property is included in the scheme. If in doubt, speak to the builder or developer about whether they take part in the scheme.
- The price of the property needs to be £600,000 or less
- You need a deposit of at least 5%
How does it work
You need to have a deposit of at least 5% of the property’s value. The Government then provides an equity loan of up to 20% of the property value. You then need a mortgage to cover the remaining value of the property, up to 75%. However, if you’re buying a home in a London borough, you could get an equity loan of up to 40% of the property value. Which means you would only need a mortgage of up to 55%. You can put a deposit down of more than 5% if you have this available as long as your deposit and the mortgage loan equal 80% of the property value.
What Interest Will you Pay
The equity loan from the government is interest free for the first 5 years. After this you will be charged interest of 1.75% per annum on the outstanding amount of the equity loan. You can start to pay back your equity loan at any time. From the fifth anniversary of the loan this fee will increase each year by the increase (if any) in RPI plus 1%. Please note, the minimum amount you can pay back is 10% of the value of your property at the time the payment is made.
This means you will technically have two loans; Your mortgage and the government equity loan. Which means after the 5th year you will also have a direct debit payment for the interest of your Help to Buy loan as well as your mortgage payment.
Example (outside London)
- Purchase price: £100,000
- Your Deposit: £5000 (5%)
- Government Equity Loan: £20,000 (20%)
- Mortgage / Loan amount: £75,000 (75%)
You must repay the same percentage to the Government as the initial equity loan, so if you took an equity loan of 20% to help buy your home, you would need to repay 20% of your home’s value at the time you repay the loan.
When does it need to be repaid?
The equity loan must be repaid after 25 years or earlier. The two most common methods are:
- Selling your home
- Remortgaging with a higher loan (if possible). So based on the figures in the example above if you were to wait a few years and have paid off say 5% of your mortgage (as your loan will reduce after years of payment). This means you would now have 10% equity in the property. Therefor if you are or become eligible for a higher loan amount of 90% loan to value so £90,000 you could then repay the £20,000 equity loan (20%) back to the government. Of course this is based on the property value staying the same and you would need to check affordability based on your circumstances at the time to see if this is possible.
What happens if the property increases or decreases in value
The government loan is a percentage of the property value which means if the property increases or decreases so does the loan amount you have to pay back. For example based on the figures in the example above; If your property increases in value by 10% you would have to pay back £22,000. Whereas if the property decreases in value by 10% you would have to pay back £18,000.
Guide to purchasing a property using the scheme
1. Speak to a mortgage advisor
Firstly you should speak with your mortgage advisor to find a suitable lender based on your circumstances and how much you can borrow.
2. Decision in Principle (DIP)
The next step would be to get a Decision in Principal approved from the chosen lender. This is a certificate from the lender confirming they are willing to lend to you. This is also known as an agreement in principle (AIP). At this point you have the reassurance of funds available when property hunting.
3. Find a property
Find a potential new home from a builder participating in the Help to Buy scheme. Properties can be found from your local Help to Buy agent’s website on www.helptobuy.org.uk. Or if you’re visiting a new housing development, ask the builder if they’re participating in the scheme.
4. Make your reservation with the builder / developer
Once you have your reservation with the developer they will provide a Reservation form. You will also need a Property Information Form to be completed which can be downloaded from the Help to Buy website. At this point you may need to pay a reservation fee to the builder.
5. Apply for equity loan with Help to Buy agent
Both the reservation form and property information form will need to be sent to the Help to Buy agent. They will then assess your equity loan application and, if successful, will issue an ‘Authority to Proceed’ (ATP) which you’ll need when you apply for your mortgage. This will be emailed to you and you’ll also receive a copy in the post. Please bare in mind an ATP is based on the specific property you are purchasing so if you change property you will need to apply for a new one.
6. Mortgage Application Submitted
Once you have received your ATP you can then go back to your mortgage adviser who can now complete your mortgage application. Once the application is submitted, assessed and valued by the lender hopefully the mortgage will be approved and a mortgage offer will be produced.
Once the Mortgage Offer is produced it would then be over to the solicitors to handle the legal side of the purchase. You will have to instruct a solicitor before the mortgage application is submitted as this information is required in order to complete the application. Both the person buying the property and the developer selling the property will each have there own separate solicitor. Once the legal work is complete an exchange and completion date can be set.
On completion of the purchase your solicitor will register a second charge on your home to cover the equity loan.